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Attorney General Lockyer Files Lawsuit That Puts State's Fight Against Enron Games On New Path

Complaint Against PowerEx Over ‘Ricochet' First To Allege Antitrust Conspiracy

Wednesday, May 18, 2005

Contact: (415) 703-5837, agpressoffice@doj.ca.gov

(SACRAMENTO) – Attorney General Bill Lockyer today filed a lawsuit against PowerEx and Public Service Company of New Mexico (PNM) in which the state alleges for the first time that Enron-devised trading schemes used to inflate prices during the Energy Crisis – in this case "ricochet" transactions – constituted a conspiracy to restrain trade that violated California antitrust laws.

"Ricochet was one of the power companies' favorite Enron games, and they used it to gouge Californians by more than $1 billion dollars," said Lockyer. "Our evidence shows PowerEx was the most prolific practitioner of ricochet. This lawsuit seeks to hold them accountable for their rampant antitrust violations and recognizes a fundamental reality – they couldn't have done it without co-conspirators."

The complaint filed in Sacramento County Superior Court seeks treble damages that could total billions of dollars. PowerEx, a wholly-owned subsidiary of BC Hydro headquartered in Vancouver, British Columbia, and PNM sold more than 800,000 megawatt-hours (MWh) of power through illegal ricochet transactions during the Energy Crisis, the complaint alleges. One MWh is enough energy to power 1,000 average California homes for one month.

During the Energy Crisis, sellers used the ricochet scheme, also known as "megawatt laundering," to evade price caps in the market operated by the California Independent System Operator (ISO). During supply shortages, ISO paid premium prices far exceeding caps for energy imported from outside the state. These sales were completed outside ISO's centralized market and were called "out of market (OOM)" transactions.

Ricochet refers to the tactic of buying power in the state, "exporting" it outside ISO's control area, then "importing" it back into ISO's area and selling it at inflated prices as OOM transactions.

Under written agreements, the complaint alleges, PowerEx purchased energy in a California market run by the now-defunct Power Exchange, exported it to PNM and the Colorado River Commission (CRC), then imported it back into ISO's control area through OOM sales "at a greatly inflated price." From May 2000 through June 2001, the two defendants and CRC used ricochet transactions to export and re-import in the same hour at least 806,525 MWh of energy during at least 4,024 hours.

"As a result of the manipulation by PowerEx, PNM and CRC, the prices of electricity in California increased significantly," the complaint alleges. "As a direct result of this manipulation, California customers were overcharged over a billion dollars during the (Energy Crisis)."

The defendants' ricochet arrangements, according to the complaint, constituted "a series of anticompetitive agreements" designed to restrain trade by limiting supply, and establishing and increasing the price of electricity in California. Additionally, the defendants misrepresented the ricochet sales as "imports" to collect inflated OOM prices, when in reality the power originated in California, the complaint alleges.

"The conspiracy caused disruptions in the ISO grid, power shortages and higher prices ...," the complaint alleges. "In consequence of these acts, these higher prices were ultimately passed to California consumers."

In a January 4, 2001 "California Update" submitted to the BC Hydro Board of Directors, PowerEx officials reported BC Hydro would earn more than $1 billion from electricity trading in the fiscal year that ended March 31, 2001. Other internal documents graphically illustrate PowerEx's dominance of the ISO real-time market, where most ricochet transactions occurred. For example, in a December 7, 2000 email, PowerEx official Jeff Lam reported to colleague Douglas Little that preliminary figures showed PowerEx's real-time sales comprised 79 percent of ISO's real-time requirements in November 2000. Those sales, Lam added, brought in $148 million in revenue.

The antitrust lawsuit is the third complaint filed by Lockyer against PowerEx. On February 10, 2005, he sued PowerEx for massive gouging of the state agency (California Department of Water Resources) that bought power on behalf of ratepayers at the height of the Energy Crisis. And on December 22, 2004, Lockyer filed a lawsuit alleging PowerEx unilaterally violated California's commodities fraud law by engaging in ricochet and other Enron games such as Death Star, Fat Boy and Get Shorty.